International Air Transport Association said yesterday that industry earnings suffered the first year-on-year decline for two years in the three months to June as fuel costs rose and capacity increases outstripped demand.
Early figures for 16 carriers showed operating profit shrinking by one-third and net income tumbling by almost two- thirds. North America, the Asia-Pacific region, and Latin America are all showing declines, while European earnings advanced only because traffic disruption caused by a volcanic ash from Iceland crimped profit last year.
Is anyone surprised by this news? You shouldn’t be.
J.P. Morgan yesterday revised downward the outlook for airlines throwing out of the window its earlier assessment that 2011 would be a big year for the industry, but five months of downward trends has been too much for JPM to hold back any longer.
Three years ago this news team stated that 2010 would be a good year as business travel expanded on expectations and oil struggled to reach $100, while 2011 would be harsh with the average oil price topping $125 (some said a drive towards $200 was a real possibility). This would lead to worse still in 2012 because of the blindingly obvious fact that the recession would only filter down to the consumer in 2011/2012, reducing load factors right at the same time as new aircraft deliveries are being ramped-up and airlines across the globe rushed to bring parked aircraft back into service. On top of this, running all year, there has been the growing shadow of increasing sovereign debt, a far worse situation than could have been foreseen in early 2009, and something that has dented global demand and will continue to do so at the very least in the months to come. It has already lead to deflationary pressures in some countries and this could yet spread further. The news yesterday that the Swiss are taking urgent action to slash rates in a bid to reduce the value of their currency says it all. Investors are scrambling for traditional safe havens of gold and the SFr.
It’s easy now to see where the rosy forecasts went wrong – they all relied on the correlation between fuel prices and airlines. Fuel prices were supposed to fall in 2011 according to some estimates, and they did, but only by a small margin before they rose again, carving deeply into airlines’ operating margins. This is a lesson that needs to be heeded – fuel is a major aspect yes but so too are load factors, capacity issues and ticket pricing and the pressures affecting the same. This should carry far more weight than it does currently in financial centres of the globe.
All that said, fuel should start to fall in line with demand and the cuts in US spending announced this week could well tip that nation back into recession and so give fuel prices a good knock back towards $100-110. Another aspect to look out for is ticket prices. In many zones good gains have still not been enough to keep up with inflation.
I must take this chance to leave you all with a thought for the weekend, something that is not getting much press now, but in a decade will be a huge story:
Airlines have ordered so many aircraft over the past five years that the global fleet in a decade time will be double that of ten years ago and yet this current economic problem will compound the issue of aging populations. If we take into account the fact that the populations of the UK, Germany, China and just about every other country in the G8 other than India and France are aging rapidly, we must consider where the burden for care will fall and this leads to the logical conclusion for the near future: Decreased standards of living with a smaller population unable to travel as much will lead to airline overcapacity and ticket price pressures to an extent not seen previously. The global downturn has done much for aviation consolidation but it must speed-up over the next decade to avoid upheaval.